Special Coverage

Judge rules in Magna-rebate shop case

A federal bankruptcy court judge has ruled that Magna Entertainment Corp, the defunct racetrack operator, had wrongfully withheld money owed to several rebate shops after it declared bankruptcy in 2009.

In a ruling released on Monday, Judge Mary Walrath of U.S. Bankuptcy Court for the District of Delaware wrote that the rebate shops were entitled to funds held by Magna if those funds were intended to be distributed to winning bettors, a decision that could serve as precedent. Walrath also ruled, however, that Magna was entitled to treat any fees or commissions due to the sites as unsecured debt.

The ruling was based on a lawsuit filed by Redrock Administrative Services, Racing and Gaming Services, AmWest Entertainment, Bettor Racing, and Elite Turf Club, seeking a total of $7.3 million. All are domestic or offshore rebate shops with limited clientele, some of which are the largest bettors in racing.

The part of the ruling favoring the rebate shops hinged on the interpretation of settlement fees, which are funds distributed by racing sites to other sites in order to make up for any deficits in the amount of money paid to bettors at a specific sites. The deficits arise because some bettors at a specific site can win more than they wagered into the pool, even over the long haul, requiring a settlement between the host track and the site.

Citing state trust laws, the judge ruled that the portion of a settlement that is paid to eliminate the imbalance should be defined as funds held in trust on behalf of winning bettors, which are not protected by bankruptcy. But she also ruled that any commissions or fees earned on the settlement amounts can be classified as unsecured debt, meaning that the entities owed the fees have to stand in line with all the other unsecured debtors for those fees while the bankrupt entity is reorganized.

“Based on the express language of the state statutes, the court concludes that there is a statutory trust in favor of the winning bettors,” Judge Walrath wrote, whereas money owed for fees and commissions “is simply a general unsecured claim against the debtors’ estate.”

The sites had paid their winning bettors at the time that the bets were won. Settlement funds are frequently settled on a weekly or monthly basis, because, in most cases, the settlements tend toward balance over the long term, since, on average, few batches of bettors can successfully win more than other bettors. However, most of the rebate shops’ clientele are professional bettors, and so the sites are often owed settlement money over the long run.